As Default Looms, Venezuela Pushes Highly Dubious Oil Deals

Teetering on the brink of utter economic collapse.

Venezuela, teetering on the brink of utter economic collapse, is rushing through a tender for billions of dollars of drilling contracts to boost oil production in the Orinoco Belt.

Venezuela has seen its oil production fall slightly each year for more than a decade, but the declines have accelerated this year as scarce funds led to cutbacks by oilfield service companies. Venezuela’s oil production is down about 250,000 barrels per day so far this year, dropping to 2.33 million barrels per day as of August. That is also about 330,000 barrels down from the 2015 average.

The combined effect of low oil prices and falling production has pushed Venezuela to the brink.

In an effort to staunch the bleeding, Venezuela’s PDVSA said on Sept. 21 that it has awarded $3.2 billion in contracts to drill in the Orinoco Belt. The contracts, PDVSA says, will add 250,000 barrels per day within 30 months from about 480 wells to be drilled.

The deal asks the drilling companies to pay for the cost of drilling and then receive compensation in future oil production. PDVSA described its drilling campaign as “one of the world’s largest drilling projects.”

However, Reuters reports that some of the foreign companies involved are uncomfortable with the way the tender was rushed, and they also question how viable the contracts will be. A few of the winners have political connections to the president, and also have very little experience in oilfield services, raising questions about favoritism. Also, the cost estimates appear to be too high, a source from one company told Reuters.

Moreover, some companies are wondering why PDVSA is choosing to invest in heavy oil when it can no longer afford to import sufficient volumes of lighter blending fuels to blend the heavy crude into a marketable product. PDVSA does not have enough cash to import the diluents, which will make heavy oil production difficult. Oil tankers with diluent have arrived at Venezuelan ports this year, but many have been forced to sit idle offshore awaiting payment. Some have given up and left.

Schlumberger Ltd., Horizontal Well Drillers LLC, and Venezuela’s Y&V Group won contracts for the new drilling campaign, and Halliburton and Baker Hughes will offer to provide some services.

Schlumberger was one company in particular that had reduced its activity in Venezuela after not receiving sufficient payment for its services. The oilfield services giant appears to be mollified, however, and is sticking around in the troubled South American nation.

Meanwhile, Venezuela and PDVSA are trying to convince creditors to accept a $7 billion bond swap to relieve the country of crippling debt payments falling due in the next two months. The proposal called for extending debt maturities out over the next few years, giving Venezuela some breathing space. Investors, according to Bloomberg, were not exactly warm to the idea, which offered nothing more than face value, plus PDVSA’s U.S. refining arm Citgo as collateral.

The value of PDVSA’s bonds sunk after the news. Bloomberg reported that the cost to insure PDVSA’s bonds against default jumped this week, and the price implies a slightly better than 50-50 chance that the company will default within the next year. “We think it’s fair for all those bondholders who have been with us and enjoyed excellent profits to keep that profit that is now even a bit better and with much better guarantees,” Venezuela’s oil minister Eulogio Del Pino said.

“PDVSA needed to get this right, and they didn’t,” Russ Dallen, managing partner at Caracas Capital, wrote in a note to investors, according to Bloomberg. “What this means for PDVSA is that default is ever more likely.”

Conditions for both Venezuela and PDVSA continue to deteriorate, as The New York Times detailed this week. PDVSA has tried to convince the financial markets and its creditors that it will bounce back, but that appears to be wishful thinking. As things grow worse, a default could trigger faster production declines. By Nick Cunningham, Oilprice.com

Say PDVSA defaults so what? Will Schlumberger, Baker Huges and friends run away? No. The creditors may throw a tantrum, and wait a decade or so to see if they get paid something.
The cash-strapped government, this or any other, will just move forward with this drill-for-oil contracts.
The oil still there, happily the US will never bomb and destroy South-America; therefore, no matter who’s on office, the Venezuelans will keep the rule of their own country.

Nicko

Sep 24, 2016 at 7:27 pm

There just won’t be much to rule. As you say, the oil will stay in the ground.

anthony hall

Sep 24, 2016 at 8:50 pm

why is the US pushing a Venezuela default? they have Canada`s Oil Sands corrosive molasses on the door step. it`s still “reds under the bed” . Maduro must go and be replaced by Fascist Death Squads.

nick kelly

Sep 24, 2016 at 11:57 pm

The recently retired President of Uruguay, who is himself a socialist who was imprisoned by the military, has described Maduro as ‘mad as a goat’

nick kelly

Sep 25, 2016 at 12:04 am

If the US was pushing for a default it could simply forbid the US based Haliburton etc. from doing business with the regime.
Somehow along with the usual Marxist claptrap the notion has circulated that Venezuela is under a US embargo.
Venezuelan crude is sold daily to US refineries.
Don’t blame Maduro’s mismanagement on the CIA.

JerryBear

Sep 25, 2016 at 3:26 am

Venezuela is a pretty drastic example of a failed state. But so are Right Wing Honduras and San Salvador.

d

Sep 25, 2016 at 5:10 am

The whole of central America below Mexico, still has not recovered from the damage wrought by leftist inspired revolutionary wars.

Blaming the right for the mess in those place’s is like blaming bush for the 2000 financial and recession issues or O bummer for the 08 financial problems.

O bummer, unlike Bush, can be called to account, for his failure to do anything meaningful, to resolve the effect of the crisis, on middle class America.

Which is why the American economy, is still a stagnant, pig/cat/dog, after 8 year’s of O bummer.

If there is a god perhaps lightning will strike the last trump Clinton debate, giving American the Opportunity to elect, Jill stein.

She would have to be better, than the last bush, O bummer, and her current opponents.

robt

Sep 25, 2016 at 12:40 am

The US doesn’t have to push a Vz default – they’ve proven perfectly capable of doing it themselves. About the only other thing Venezuela is capable of is blaming everyone else for their own mess.

chris Hauser

Sep 24, 2016 at 10:25 pm

uh, this is april 1, yes?

next thing you know, conoco will be a bidder. not.

Alan Bachers

Sep 25, 2016 at 11:15 am

OK, you wanted comments from informed readers. Here is a super picky one from The Grammarist re: paragraph 4:

Some dictionaries accept stanch and staunch as variant spellings of each other. But if you want to avoid confusion, use stanch as the verb meaning to stop the flow of, check, allay; and use staunch as the adjective meaning firm and steadfast or having a strong constitution. This is how the words are usually treated in edited books and news sources.

Islander

Sep 25, 2016 at 11:40 am

What happens in Vz all depends on China, which is that country’s largest creditor having loaned over 115B usd to them in just the last decade. Vz infrastructure, satellites, etc are all made in China, and their recent pull back is responsible for most of the inflation and misery over there.

Of course with our country discovering that we can get at shale oil, Vz is of far less importance to us than before. And the Chinese are currently full to the gills with stored crude and feel secure, energy wise. So Vz is truly in a bad position with little leverage. But as they say, when there’s blood in the street and things look just terrible, that’s when it’s time to buy. Looking for Venezuelan investment opportunities is definitely on my to do list!

Humpty Dumpty

Sep 25, 2016 at 11:57 am

As anyone sentient knows, Venezuelan leftists control that country, and like all leftists, they spend the bulk of their time trying to attain ideological purity and so, today, internecine fighting is first and foremost. When the oil fields were nationalized under PDVSA, the service company relationships HAD to be continued much to the dismay of the left. The evil Halliburton, Chevron-Texaco, PDVSA axis has been a thorn in their side since Chavez days and they have sought to find different and more politically correct alliances for PDVSA under Maduro. But a politically correct hard left field service group from say, Bulgaria or Bolivia would not seem to be a strong peg to hang one’s hat when technology in the oil fields must be cutting edge to be competitive. This PC maneuvering has further degenerated the production situation and holding out on Halliburton the $750 million PVDSA owes is done simply to allay the more militant leftist faction now in ascendancy in Venezuela. Halliburton is not publicly saying so, but this is a write off in the making and they are tip-toeing away from further ‘lending’ to PVDSA so they might recover what assets they have and weather a coming storm to last at least a decade. PVDSA will continue to move hard left and exports and development will degrade into the chaos now a pattern all across Venezuela. The ruling mindset in Venezuela moving toward ideological purity as always happens with the left means atrocity will be the next word to show up on their streets. This is socialism in its full flower – and it is always done in the name of The People.

Thomas Malthus

Sep 25, 2016 at 3:54 pm

Saudia Arabia is even more socialist than Venezuela….

The thing is… that is not the issue…

THIS is the issue:

Here are the break-even oil prices for 13 of the world’s biggest producers

Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said

Thomas, I have seen these so-called break even prices for various countries from time to time, and I do not buy them. It was not that long ago that the whole world was < $30. Just saying.

Thomas Malthus

Sep 28, 2016 at 2:51 pm

Yep it was not long ago the break even was a fraction of what it is now…. and it as not long ago gold was under $400 an ounce eh….

This gives a whole new slant to the peak oil story….. it is not a story of running out of oil …. it is a story of running out of cheap to extract oil…

It is not as if this was unexpected – two of the most experienced oil geologists predicted this was going to happen in 1998… and they were dead on the money on timing….

THE END OF CHEAP OIL Global production of conventional oil will begin to decline sooner than most people think, probably within 10 years
Feb 14, 1998 |By Colin J. Campbell and Jean H. Laherrre http://dieoff.org/page140.htm (originally appeared in the Scientific American)

> A new analysis concludes that easily extracted oil peaked in 2005, suggesting that dirtier fossil fuels will be burned and energy prices will rise

Have you noticed that big oil is losing billions every quarter – in spite of slashing capex to the bone?

Have you noticed that Saudi Arabia is taking on massive amounts of debt — and is slashing spending?

You may have seen the articles from Wolf on how Pemex in Mexico is dying?

Venezuela …. Alberta….

I could go on and on ….

Let’s check the credentials of Steven Kopits who says the industry needs $120:

Steven Kopits

President

Steven heads Princeton Energy Advisors.

Previously, he managed the New York office of Douglas-Westwood, where he led dozens of projects related to oil field services and technologies for clients including Baker Hughes, GE Oil & Gas, and ITT, as well as for private equity funds including ArcLight and Advent.

He was earlier an investment banker with Dahlman Rose & Co., focusing on public and private capital raising for maritime and oil field technology companies. In addition, as Director for Financial Advisory Services, Steven established and headed the private equity advisory service for Deloitte & Touche in Central Europe.

He holds an undergraduate degree from Haverford College, an MBA in Finance and Accounting and a Masters specializing in International Economics from Columbia University.

Steven writes frequently on macro energy topics for a number of publications, including Foreign Policy, Oil & Gas Journal, and World Oil. He has testified in Congress about China’s oil and gas outlook and speaks frequently on oil and the economy.

no, it’s thievery in full flower. go there. see where the subsidized gas goes.

Bookdoc

Sep 26, 2016 at 10:03 am

My sentiment is that any company that signs a contract for future money from this regime is nuts. Past behavior has shown that they will not honor contract and will nationalize any work done. Only a fool would trust a socialist idiot government!

nick kelly

Sep 26, 2016 at 9:58 pm

I’m a right winger but I do have to say there are well- run socialist countries, Sweden for one, Uruguay for (sorry) really a second world one- but nice.
Maduro is in a small class, along with Kim in North Korea and Mugabe in Zimbabwe.
Oh sorry I guess there’s a few People’s Republics in Africa but the difference is that Venezuela was prosperous- as was Zimbabwe when it was Rhodesia and a bread basket for Africa.

Most Africans were better off- now food is their main concern.

steve

Sep 28, 2016 at 11:47 am

Nick, the African countries were much better off in the old colonial days for sure.